Flat-Rate vs Hourly Rate: Pros & Cons of Each Pricing Model

What Is Flat-Rate Pay?

Flat-rate pricing is a billing method that charges a fixed price for a job upfront, after factoring in direct costs for parts and labor and the indirect costs of overhead expenses.

The price doesn’t change for this billing method, even if the task costs more and takes up more hours of work than anticipated.

Therefore, a flat-rate pay system can work well for short-term jobs with well-defined scopes.

Example of Flat-Rate Pricing

An example of a plumbing business charging flat fees for installing a new toilet might include setting specific prices for:

• The new toilet

• Hours spent on the job

• Permit fees (if necessary)

• Commissions

• Per billable hour overhead costs

• Profit as a percentage of the final selling price

• Labor (hourly rate) 

What is a fair hourly rate for a plumber? According to Home Guide, the cost of a plumber ranges from $500 to $800 for large repairs and $75 to $250 for small jobs. 

With all these variables accounted for, the flat-rate price you quote for installing a new toilet might range from $500 to $700. 

What is Hourly Rate Billing?

Hourly rate (hourly pricing) involves charging customers for the hours needed to complete the job plus the materials used.

To use this billing system, you estimate the hours it will take to complete the job and multiply that number by your hourly fee.

Hourly pay works well for small-business owners who may lack experience in the trades. 

But it may not serve an experienced, self-employed home service professional or freelancer who, due to years of honing their craft, has learned to condense a three-hour job into one hour.

Example of Hourly Billing

Let’s say, an HVAC contractor charges $100 per hour and a minimum service-call fee of $150. 

Based on the amount of work, the HVAC contractor predicts the job will take three hours.

This means the customer pays $150 for the first hour and $100 for the remaining two hours. 

So, in total, the client will pay $350 ($150 + $100 + $100).

Flat Rate vs. Hourly: Pros and Cons

Each pricing model has advantages and disadvantages for not only your company and employees, but also your customers. 

Let’s consider the pros and cons of each.

Pros of Flat-Rate Pricing

Flat-rate pricing pros for the customer

• Answers the customer’s main question: How much will it cost?

• Closes the door on price concerns since they know the fixed cost in advance.

• Eases the pressure of a home-service call, removing the need for customers to closely monitor the flat-rate tech’s progress.

• Eliminates repair-bill surprises, even if a tech needs more time to complete the work.

• Easy for customers to understand and for your techs to sell.

Flat-rate pricing pros for the contractor

• Rewards high performance and above-average productivity when jobs take less time than you predicted. This allows your company to book more jobs and earn more revenue.

• Allows you to set prices based on the true value of your services and the scope of work.

• Eliminates the problem of unapplied labor (underperforming techs).

• Lets you deliver the agreed-upon service with no need to justify your hourly rates.

• Shortens the billing cycle, allowing customers to prepay the fixed cost or pay the flat-rate technician on-site for completed work.

Cons of Flat-Rate Pricing

Flat-rate pricing cons for the customer

• With less itemization for your flat-rate work, customers may view it as a sales gimmick or upselling.

• Doesn’t allow customers to negotiate the price.

• The service may seem overpriced, especially if the customer doesn’t understand the value your company brings to the job.

• Creating a high-pressure environment to perform may leave your clients feeling that your techs cut corners to complete jobs (which is sometimes true).

Flat-rate pricing cons for the contractor

• If the job takes longer than estimated, you may end up earning less than your regular hourly rate.

• Clients may insist on hourly invoicing or want to haggle over your flat-rate pricing.

• Flat rates are approximate, so you may get locked into a certain price even though the job was more complicated than you initially thought. 

• With the emphasis on performance, slower flat-rate workers may struggle to earn.

• Slow periods may require creative job reallocations to meet performance goals.

Pros of Hourly Rate (Time and Materials)

Hourly rate pros for the customer

• Customers understand hourly rates or T&M (time and materials) pricing. So, they use it as a baseline to compare prices from different service providers.

• Some customers appreciate an itemized list of everything included in their home repair bill.

• Per-hour billing tends to work better for clients with long-term projects rather than short, sporadic jobs.

Hourly rate pros for the contractor

• Allows you to track the exact amount of time a job will take and invoice the customer on completion or at certain phases on big projects.

• The hourly rate pay system allows you to account for changes and other variables (and charge for them) as they arise.

• Your techs, CSRs, and other employees know their hourly wages and how many hours they need to work each week to reach a particular pay level. This keeps employees productive

Cons of Hourly Rate

Hourly rate cons for the customer

• Customers may feel compelled to stand watch over your techs to ensure they’re not wasting time to reach a certain number of hours.

• Techs who don’t perform at a high level may cost customers more money for less work.

• Unexpected changes and other variables may significantly increase the project's cost.

• Customers prefer predictability rather than uncertainty of the outcome. 

Hourly rate cons for the contractor

• Charging by the hour requires detailed bookkeeping and time tracking. Many contractors are too busy to do this regularly and accurately.

• Billing hourly provides no incentive for your techs to perform quickly and efficiently. This means your company may lose out on new revenue.

• T&M pricing limits your profitability, but pricing focused on production boosts your revenue potential.

• You may frequently have to remind techs to invoice customers correctly.

Hybrid Rate Pay

Hybrid rate pay involves using both a flat and an hourly rate to bill a customer based on the peculiarities of the job at hand.

For example, you could charge a flat rate for installing a faucet since you can predict precisely how long it will take, having done it many times. 

The labor costs, the price for materials, and a small markup are all baked into the fixed rate.

In contrast, you would have to charge an hourly rate for repairing a damaged main water line, which can take days to fix and may involve unforeseen complications.

The key benefits of using hybrid-rate pricing are:

• A hybrid rate supports flexibility, allowing you to tailor your billing method to match each job's scope of work and requirements.

• Hybrid billing ensures you're always making a profit since you can adapt your billing method to each job's complexity.

How Software Can Help Businesses Price Jobs Accurately with Flat Rate or Hourly Billing

Regardless of which pricing model you choose, there’s operational software for almost any type of business that can help price jobs accurately and profitably. 

We’ll use field service businesses—like plumbing, HVAC, and electrical—and our software, ServiceTitan, as an example, since accurate pricing and deciding between flat rate and hourly models is critical in these trades. But overall, automating or standardizing pricing with software benefits nearly any business.

These include:

• Upload a pricebook that your business is already using, so you don’t need to start from scratch if you already work with one. 

• Build a pricebook from scratch — useful for small businesses offering a limited range of services.

• ServiceTitan’s Pricebook Pro: This add-on feature comes with a wide range of pre-built, flat-rate services to give you a head start on building out your pricebook.

• Pricebook Connect: Integrate with supplier catalogs that are automatically updated with the latest prices and product information.

• Super-efficient price editing, either in bulk, across multiple pricebooks, or individually. You can set up rules that automatically update your pricing when material costs and labor rates change.

• ServiceTitan Mobile: Gives techs instant access to pricing information and estimate templates so they can create Good-Better-Best proposals while out in the field.

• Integrate with other business operations: Including, dispatching, payments, invoicing, and more

Whether you choose flat-rate, hourly pay, or a combination of the two as your billing method, ServiceTitan software simplifies pricebook management, saves time, and provides peace of mind to field service business owners looking to protect their profit margins and get the most out of every job.